The Pound to Euro Conversion and Buying a House in Europe - Wait or Buy Now?

Looking for advice on when to exchange your pounds for euros? Below we look at the outlook for the pound to euro exchange rate from the perspective of those looking to buy a property in the Eurozone.

Buyers poised to procure their dream chateau, or that Dutch canal house may be wondering whether now is a good time to buy or to wait for a more favourable currency climate.

The pound doesn’t have the muscle it once had – not against the euro, not against the dollar not against any major currency for that matter.

After weakening drastically since the end of 2015, it has fallen from a peak of 1.4322 to the euro in November, to lows of 1.2612 in February this year.

We have witnessed something of a recovery through March and note it could extend a little further. However, the underlying trend is still lower and we would suggest that those who cannot afford to transfer at lower rates act now in order to minimise risk.

Many who would have been considering buying a property in Europe may be having second thoughts due to the exchange rate erosion.

To put the decline in perspective, take the example of a 300,000-euro home. Such a home would have cost 209, 468 British pounds in November 2015 when the exchange rate was at 1.4322; today the same house would cost 232,594 pounds, an increase of 23,126 pounds in four months, amounting to a roughly 10% rise in cost simply due to the weakening pound.

Given the pound’s extraordinary decline now would not seem the best time to buy a property in Europe, and indeed many analysts would concur, arguing sterling may have reached a bottom, thus skewing risks to the upside.

The primary reason for sterling’s decline has been fear of the consequences of the U.K leaving the European Union and ultimately we will not know for sure whether the U.K will exit until after the June 23rd referendum.

If the U.K votes to leave, the pound will almost definitely weaken even more, with most economists expecting it to lose 10-20% in the immediate aftermath.

Those with an eye on their dream holiday home therefore might be better off buying before the referendum or they might just lose their chance forever.

Using Currency Forwards and Options

Alternatively, forward buying euros at the current exchange rate for delivery at some date in the future – whether five, six months or a year in the future, could be another way of side-stepping referendum-risk.

Forwards essentially lock in the current exchange rate, erasing any potential currency risk. On the downside the buyer of the forward can also miss out on any favourable appreciation in the rate – something worth considering in this situation.

Another way for buyers to hedge their risk around the referendum might be to forward buy half the euros they need now, and the remainder at a later date – either after the referendum or at the purchase date.

Some brokers also offer currency options which enable buyers to forward buy but also to potentially profit from an appreciation in the currency, so that if the exchange rate moves in their favour they are rewarded, whilst if it doesn’t they still get the protection afforded by a standard ‘forward’ contract.

Options often work well around volatile events, making it the perfect tool ahead of the June 23 referendum, since large moves can often follow. 

If you were a betting man, however, you would be expecting the U.K to remain in the EU as betting agencies currently see the ‘stay’ camp as favourites. Most major bank analysts also believe the electorate will vote to stay.

Indeed, if Britain votes to stay the pound will rise sharply, with some expecting to increase by as much as 10%, which would essentially see it climb back up to November 2015’s levels in the 1.40s.

Therefore based on purely weighing the probabilities the most prudent course of action could be to wait - hoping the betting agencies are right and the pound will discount its Brexit premium. 

Contrarian View

The view of analysts at Barclays, however, stands out because it sees GBP/EUR appreciating after a Brexit due to the domino-effect of copy-cat referenda throughout Europe causing a comparable depreciation of the euro.

Nevertheless, this represents the minority view, as most analysts expect the pound to come crashing down in the event of an 'out' win, and it could take a long time for sterling to recover from such a drastic devaluation, all things being equal. 

PS: Copy signals, Trade and Earn on Forex4you - https://www.share4you.com/en/?affid=0fd9105